Good, tough technicals to ask?

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I want to up the technical difficulty of my interviews -- what are some tough but fair technical questions to ask people who have 2-5 years of IBD experience? (i.e. beyond the "If depreciation goes up by $10", or "How do you calculate FCF" questions)

Comments (37)

 
Apr 10, 2013 - 1:09pm

Ask about pensions or the translation of subsidiary accounts reported in different currencies at a group level.

 
Apr 10, 2013 - 2:57pm

Ovechkin08:
Ask about pensions or the translation of subsidiary accounts reported in different currencies at a group level.

Credit rating agency pension-related adjustments is a good one. Affiliate accounting is also good (i.e. you pay cash to raise your stake in a JV from 19% to 49%, what happens to NI? What about 51%? If there is a dividend what are the tax implications).

 
Apr 10, 2013 - 1:15pm

You could ask things like "would you rather have $100 million of cash or $100 million of EBITDA?"

Stuff on capital structure...

What type of return an investor would need on a particular tranche if the interest on another tranche is x%.

If we buy a business at 6.0x EBITDA, and exit in 5 years with no multiple expansion how much EBITDA growth do we need for a 20% IRR, if we assume that have 4.0x leverage on entrance EBITDA and we pay down 50% of debt within the time period.

Things like the above...

[quote=Dirk Dirkenson]Shut up already. Your mindless, reflexive responses to any critical thought on this are tedious. You're also probably a woman, given the name and "xoxo" signoff, so maybe the lack of judgment is to be expected.[/quote]
 
Apr 10, 2013 - 3:18pm

Louboutins and Leverage:
You could ask things like "would you rather have $100 million of cash or $100 million of EBITDA?"
If we buy a business at 6.0x EBITDA, and exit in 5 years with no multiple expansion how much EBITDA growth do we need for a 20% IRR, if we assume that have 4.0x leverage on entrance EBITDA and we pay down 50% of debt within the time period.

Things like the above...

isnt that just math in your head as opposed to strong fundamentals? your question about capital structure tranches sounds good though

 
Apr 10, 2013 - 7:05pm

WSOH:
Louboutins and Leverage:
If we buy a business at 6.0x EBITDA, and exit in 5 years with no multiple expansion how much EBITDA growth do we need for a 20% IRR, if we assume that have 4.0x leverage on entrance EBITDA and we pay down 50% of debt within the time period.

isnt that just math in your head as opposed to strong fundamentals?


You would need to understand the fundamentals in order to do the math...
[quote=Dirk Dirkenson]Shut up already. Your mindless, reflexive responses to any critical thought on this are tedious. You're also probably a woman, given the name and "xoxo" signoff, so maybe the lack of judgment is to be expected.[/quote]
 
Apr 11, 2013 - 12:01pm

Louboutins and Leverage:
You could ask things like "would you rather have $100 million of cash or $100 million of EBITDA?"

Stuff on capital structure...

What type of return an investor would need on a particular tranche if the interest on another tranche is x%.

If we buy a business at 6.0x EBITDA, and exit in 5 years with no multiple expansion how much EBITDA growth do we need for a 20% IRR, if we assume that have 4.0x leverage on entrance EBITDA and we pay down 50% of debt within the time period.

Things like the above...

These questions really stumped me. Can someone comment on how to answer the questions above.

When luck shuts the door you gotta come in through the window - Doyle Brunson
 
Apr 11, 2013 - 2:25pm

Can you give us the answers please? Tell me if I'm right or wrong.

Louboutins and Leverage:
You could ask things like "would you rather have $100 million of cash or $100 million of EBITDA?"
$100 million of EBITDA because you should get a multiple on it.

Louboutins and Leverage:
Stuff on capital structure...
Not a question.

Louboutins and Leverage:
What type of return an investor would need on a particular tranche if the interest on another tranche is x%.
x% plus something else, I think we need more information, but not positive

Louboutins and Leverage:
If we buy a business at 6.0x EBITDA, and exit in 5 years with no multiple expansion how much EBITDA growth do we need for a 20% IRR, if we assume that have 4.0x leverage on entrance EBITDA and we pay down 50% of debt within the time period.
I don't think you need any growth. You put $25 down to buy a $100 business. If you paid off 1/2 the debt (50%*$75 = $37.5), your equity value would be worth $62.5 ($25 + $37.5 = $62.5), which is about a 150% return, which is about a 20% IRR for 5 years. Am I close?
''You can fool some of the people all of the time, and those are the ones you need to concentrate on.'' — President George W. Bush 0.5 bb
 
Apr 11, 2013 - 3:00pm

Dubya:
Can you give us the answers please? Tell me if I'm right or wrong.
Louboutins and Leverage:
You could ask things like "would you rather have $100 million of cash or $100 million of EBITDA?"
$100 million of EBITDA because you should get a multiple on it.

I would ask more questions -- need to know what the multiple is, but more importantly, what capex, working capital needs and interest payments are (i.e. what actual FCFE is -- $100mm of cash is way better than $100mm of EBITDA less $100mm of interest and capex). Seems a little simplistic on its face but maybe I'm not being creative enough?

 
Best Response
Apr 11, 2013 - 3:16pm

Dubya:
Can you give us the answers please? Tell me if I'm right or wrong.
Louboutins and Leverage:
If we buy a business at 6.0x EBITDA, and exit in 5 years with no multiple expansion how much EBITDA growth do we need for a 20% IRR, if we assume that have 4.0x leverage on entrance EBITDA and we pay down 50% of debt within the time period.
I don't think you need any growth. You put $25 down to buy a $100 business. If you paid off 1/2 the debt (50%*$75 = $37.5), your equity value would be worth $62.5 ($25 + $37.5 = $62.5), which is about a 150% return, which is about a 20% IRR for 5 years. Am I close?

If you buy a business at 6x and put down 2x, then you've put $33.3333 down to buy a $100 business, not $25. EBITDA needs to increase ~20%, or the difference between a ~15% IRR and 20%/5 years, compounded.

 
Apr 12, 2013 - 1:51pm

Louboutins and Leverage:

If we buy a business at 6.0x EBITDA, and exit in 5 years with no multiple expansion how much EBITDA growth do we need for a 20% IRR, if we assume that have 4.0x leverage on entrance EBITDA and we pay down 50% of debt within the time period.

Assume $10m EBITDA times 6x multiple. $60m purchase ($20 equity + $40 debt). 1.2^5 = ~2.5...so a 5 year IRR of 20% needs to provide 2.5x the intitial investment. Therefore you need $50 of equity value on exit (20 * 2.5). Since half the debt will be paid off there will be $20 of debt on exit implying and EV of $70m (50 + 20). $70m divided by the 6x multiple implies year 5 EBITDA of $11.7m

 
Apr 11, 2013 - 7:52am

One specifically for PE, ask the candidate what they think is a preferable metric of a successful exit on a five year return; rate of return or exit multiple? First guess would likely be IRR as industry standard, but it always looks pretty boss cutting a check back to the LP's 3-4x on their initial check the sent you.

M+A accounting questions think are fair game. Pro forma B/S step-ups, treatment of deferred rev. / taxes.

Not sure what type of PE shop you're at; at my fund, we only manage tax exempt LP money. One thing that through me for a bit of a loop initially was going from modeling out extensive tax scenarios visa-vi NOL carry forward / back valuation, book / cash dep. etc. Maybe an idea to consider, thinking about valuation from a cash flow perspective vs. GAAP.

Ace all your PE interview questions with the WSO Private Equity Prep Pack: http://www.wallstreetoasis.com/guide/private-equity-interview-prep-questions
 
Apr 11, 2013 - 8:48am

You're not giving us the whole picture.

What sector/group?

As you move up people expect you to know your space/group/sector so the questions are tailored to that space. If you've been doing retail for years you better know the retail numbers and what could go wrong/what retail issues could come up.

At year 5 and on you've usually carved out some sort of niche.

 
Apr 11, 2013 - 10:30am

A simple but very important question that I missed in my lateral interview yesterday - what are some of the levers we can pull that will affect a sponsor's willingness to pay?

I don't do a lot of LBO's, so I don't really have a head for it - I kept thinking about the operating structure of the company about how can we drive up EBITDA / spit out cash so I targeted the expense structure. My interviewer was like all that stuff is constant, so I wasn't sure what he was gaming at.

At the end he was driving toward what effects IRR - namely purchase price, leverage, and exit multiple ( what we can sell the company for after our holding period). It's a simple concept that illustrates that you understand basically the entire concept of an LBO.

 
Apr 11, 2013 - 2:05pm

Given the B/S, IS, estimates for the company's funding requirements, assume you are asked to develop a capital structure that justifies a single -A credit rating. This target would require an EBIT-to-interest coverage ratio of, say 9.5 in your company industry. In addition, your structure must be robust enough in a downturn to retain at least a minimum rating of BBB+, giving it unrestricted access to debt markets. Your interest coverage should not drop below 7.5, even in the face of a 20 % earnings decline. You also want enough flexibility to make an acquisition of $1 Bn and retain the minimum rating.

Winners bring a bigger bag than you do. I have a degree in meritocracy.
 
Apr 12, 2013 - 12:29pm

Interesting, thanks guys. Such a weird way to talk about levering EBITDA instead of the asset you buy. To clarify, if some company has $100 in EBITDA per share and is trading for $400 per share, when someone says they're levering it 4X, how much leverage are they using? Does that mean they put $100 down and use $300 of leverage to buy 1 share?

''You can fool some of the people all of the time, and those are the ones you need to concentrate on.'' — President George W. Bush 0.5 bb
 
Apr 12, 2013 - 1:37pm

Dubya:
Interesting, thanks guys. Such a weird way to talk about levering EBITDA instead of the asset you buy. To clarify, if some company has $100 in EBITDA per share and is trading for $400 per share, when someone says they're levering it 4X, how much leverage are they using? Does that mean they put $100 down and use $300 of leverage to buy 1 share?

Well first and foremost you are thinking about a singular investor trading in a stock. No one in banking thinks of it this way. "Levering" in the banking/PE context means issuing debt instruments in order to fund the enterprise's activities and expenditures (think financing). No one thinks about leverage as you are thinking of it (borrowing money to short a stock or to enter into a long position in a stock on margin).

This isn't weird, it is a standard way of viewing a firm's capital structure which is consistent across the industry. Everyone who you talk to will know what you mean you say "we're looking at a buyout with a 7.0x entry multiple and we're looking to put three and a half turns on it."

 
Apr 12, 2013 - 1:51pm

rufiolove:
Dubya:
Interesting, thanks guys. Such a weird way to talk about levering EBITDA instead of the asset you buy. To clarify, if some company has $100 in EBITDA per share and is trading for $400 per share, when someone says they're levering it 4X, how much leverage are they using? Does that mean they put $100 down and use $300 of leverage to buy 1 share?

Well first and foremost you are thinking about a singular investor trading in a stock. No one in banking thinks of it this way. "Levering" in the banking/PE context means issuing debt instruments in order to fund the enterprise's activities and expenditures (think financing). No one thinks about leverage as you are thinking of it (borrowing money to short a stock or to enter into a long position in a stock on margin).

This isn't weird, it is a standard way of viewing a firm's capital structure which is consistent across the industry. Everyone who you talk to will know what you mean you say "we're looking at a buyout with a 7.0x entry multiple and we're looking to put three and a half turns on it."

Thanks. Regarding whether it sounds weird or not, you definitely don't know what you're talking about......it sounds weird for sure, even if everybody talks like that.
''You can fool some of the people all of the time, and those are the ones you need to concentrate on.'' — President George W. Bush 0.5 bb
 
Apr 15, 2013 - 10:39pm

adapt or die:
If you're asking people with 5 years IBD experience technical questions, you're a complete fucking tool

Apologies, however, you're the fucking tool if you're under the impression 5 yr.'s banking = 5 yr.'s of PE experience (btw, the OP stated these were for 2-3 yr. analyst). Cease to comment on this topic as you do not know what you're talking about. thx.

Ace all your PE interview questions with the WSO Private Equity Prep Pack: http://www.wallstreetoasis.com/guide/private-equity-interview-prep-questions
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